Can a Financial Institution attach and sell your one main residential house for recovering its debts?

The article attempts to review the scope of clause (ccc) to the proviso to Section 60(1) of the Code of Civil Procedure (CPC), 1908 as extended and applicable to Delhi whereby a 'judgment debtor' is entitled to exemption from attachment or sale of their one main residential house in execution of a decree of a civil court.

In a post COVID-19 world, significant businesses and lakhs of private individuals would have faced unquantifiable losses. Businesses and people alike are certain to face difficulties in repaying loans to various financial institutions they may have availed loan facilities from. Attachment and sale of their properties by financial institutions for recovering their debts could thus become more and more frequent. In such a scenario, can a financial institution attach or sell your main residential house occupied by you for recovering its debts in execution?

Section 60(1) of the CPC provides a list of properties belonging to a judgment debtor which are liable to attachment and sale for the purposes of execution of a decree passed by a civil court. Vide a state amendment, Delhi had carved out an intriguing exception to that list of properties by inserting 'Clause (ccc)' to the proviso to Section 60(1) of the CPC back in 1956.

Clause (ccc) is a form of legislation by incorporation and has been extended and made applicable to Delhi from Section 35 of the Punjab Relief of Indebtedness Act, 1934. The said amendment is also applicable to states of Punjab and Haryana, and to the union territory of Chandigarh.

Clause (ccc) provides a 'judgment debtor' under Section 60 (1) of the CPC with the benefit of having their 'one main residential house' occupied by them, to be exempted from attachment or sale by a financial institution for recovering its debts in execution.

The relevant extract of clause (ccc) to the proviso to section 60 (1) of the CPC is as follows:

"60. Property liable to attachment and sale in execution of decree.– (1)

Provided that the following properties shall not be liable to such attachment or sale, namely:-

(a)…..

…

(ccc) one main residential house and other buildings attached to it (with the material and the sites there of and the land immediately appurtenant there to and necessary for their enjoyment) belonging to a judgment-debtor other than an agriculturist and occupied by him:

Provided that the protection afforded by this clause shall not extend to any property specifically charged with the debt sought to be recovered".

The scope and ambit of the term 'judgment debtor' within the meaning of clause (ccc) has been res integra for a long time until recently, when a Division Bench of the Delhi High Court in Sujata Kapoor v. Union Bank of India analyzed the clause in-depth. The Court has given a very restrictive interpretation to the term 'judgment debtor' occurring therein, holding that the meaning of the term 'judgment debtor' has to be examined in light of its parent act i.e., the Punjab Act. The Division Bench held that only those debtors who qualify to be debtors under the Punjab Act can alone take the benefit under clause (ccc).

A plain and literal interpretation of the clause (ccc) would signify that each and every judgment debtor can avail the benefit under clause (ccc). However, one is strained to ask whether the legislature actually intended to give such a blanket benefit to all judgment. debtors in execution of decrees issued against them. It doesn't seem improbable or unlikely that there may be several judgment debtors who own and possess their one main residential house, the value of which might be far greater than the debt owed by them.

The benefit of clause (ccc) has been extended to mostly all the judgment debtors who have knocked the doors of the various High Courts as well as the Supreme Court of India. But, in all those cases, the courts did not have occasion to deal with the scope and ambit of clause (ccc) and thus the decision in Sujata Kapoor is the only decision which currently deals with this aspect.

In SC Jain v. Union of India, the benefit of clause (ccc) was extended to the judgment debtor. However, the Court was not concerned with the scope of clause (ccc). The Court was solely considering whether clause (ccc) in proviso to Section 60(1) of the CPC had not been repealed, so far as Delhi is concerned.

Similarly, in VP Arora v. Punjab National Bank, a Division Bench of the Delhi High Court had extended the benefit of clause (ccc) to the judgment debtor therein. The sole question being considered by the Court was whether a 'judgment debtor' was permitted to seek the benefit of clause (ccc) in respect of his residential house of which he became an owner after attachment but before sale of such property. The Division Bench in this particular case again did not deal with the question as to who could classify as a 'judgment debtor' under clause (ccc) to the proviso to section 60 of the CPC.

In Sujata Kapoor, one BR Dougall­ - the judgment debtor - had acted as a guarantor to a loan obtained from the respondent bank. When there was a default in the repayment of the loan, the bank preferred an Original Application before the Debt Recovery Tribunal which was decreed and a recovery certificate was issued against the judgment debtor. He was served with a notice for attachment of his main residential house situated in Civil Lines, Delhi for recovery of the loan andwas also restrained from creating any third party rights over the said property. The property was subsequently transferred to the petitioner. The petitioner pleaded protection under clause (ccc) of the CPC as the attached property was her one main residential house. The Division Bench rejected the submission of the petitioner.

It noted that the clause (ccc) is a form of legislation by incorporation from the Punjab Act and thus, as per the settled principles governing the concept of legislation by incorporation, the scope and interpretation of clause (ccc) had to be adopted from its Parent Act i.e., Punjab Act itself.

The Court noted that a "debt" defined under Section 7(1) of the Punjab Act excluded the debts incurred as a result of a trade and that a "debtor" defined under Section 7(2) of the Punjab Act only meant an agriculturist, or one who earned his livelihood as a village menial paid in cash, or kind, for work connected with agriculture. Thus, the paramount consideration for a court to determine if a judgment debtor is covered within clause (ccc) would be to check if they are a debtor within the meaning of Section 7(1) and (2) of the Punjab Act.

The Court noted that the object and reasons of the Punjab Act were to grant relief against indebtedness to agriculturists and thus, observed that clause (ccc) was introduced in Delhi to fulfil the same object only. Its meaning had to be derived from the Punjab Act itself and could not be expanded to give any unwarranted benefit to the wealthy judgment debtors. The Court observed that if the term "judgment debtor" in clause (ccc) would be given such an expanded meaning, it would only encourage fraudulent practices by debtors to evade their liability.

It was further observed that,

"It would provide a convenient escape to a person who obtains a loan from a bank, or other financial institution, or person, or otherwise incurs a financial liability, by simply investing the loan amount or the debt due in buying a residential property for himself, while ensuring that he has no other such property, and when the time to repay the same comes, to block the recovery by resort to Clause (ccc) of proviso to Section 60(1) of the Code, even after the liability is determined upon adjudication".

The kind of impact a blanket benefit of clause (ccc) could have can result in some of the most absurd situations erroneously benefitting wealthy judgment debtors.

The decision in Sujata Kapoor was not appealed before the Supreme Court since the dispute matter ultimately got settled between the debtor and the bank just before the pronouncement of the judgment. However, as a consequence of the decision in Sujata Kapoor, the law has been settled in as much as the Delhi High Court is concerned. Though, in an appropriate case, the judgment debtors would certainly like to get the issue settled by the Supreme Court.

To conclude, the judgment in Sujata Kapoor would act as a strong counter on behalf of the financial institutions to the defense taken by a judgment debtor under clause (ccc). For now, a judgment debtor could only seek the protection available under clause (ccc) to the proviso to section 60 of the CPC if he is debtor within the meaning of the Punjab Relief of Indebtedness Act, 1934 and not otherwise.

The authors are practicing advocates at the Delhi High Court and Senior Associates at Mahajan & Co Law firm.